Near-term Challenges Could Play Spoilsport: Gildan Activewear Inc. (TSX: GIL) is a manufacturer and marketer of basic apparel. The company has a diversified portfolio of company-owned brands which includes activewear, socks, underwear, legwear, and hosiery. Gildan markets its products in North and Latin America, Europe, and Asia-Pacific region.

On account of the COVID 19 crisis, the company, on March 23, announced that it has temporarily suspended the production at all of its manufacturing facilities until mid-April.

Q1FY20 Financial Highlights: GIL announced its quarterly results, wherein the company reported its net sales of US$ 459.1 million, down 26.4% on y-o-y basis. The decline was due to considerable demand erosion across the product segments on account of the COVID 19 pandemic. However, higher net selling prices in Hosiery and underwear segment supported the top line. Most of the retail markets across the world remained closed during the later part of the quarter while the Company witnessed slump in store traffic as consumers adopted social distancing measures. GIL posted gross margin of 23.2% in the first quarter, down 260 basis points from the prior year. However, adjusted gross margins were down by 120 basis points as benefits from higher pricing were more than offset by a sharp decline in volumes coupled with the increase in the labor and overhead costs. The Group reported an operating loss of US$ 92.3 million, as compared to an operating profit of US$ 83.4 million in the previous corresponding period, due to inclusion of impairment of goodwill and intangible assets worth US$ 94 million, partially offset by lower SG&A expenses. Adjusted EBITDA fell 39.8% over the previous corresponding quarter to US$ 50.2 million. GIL reported a net loss of US$ 99.3 million in the first quarter, as compared to a net profit of US$ 22.7 million in the prior year.

Q1FY20 Financial Highlights (Source Company Reports)

Stock recommendation: The stock plunged ~55% in the last one year. Moreover, it is trading about 42% lower so far this year. The sharp demand destruction is likely to weigh on the company’s financials in the near-term. The company expects a significant decline in the point of sale and shipments for the second quarter. Uncertainty surrounding the economy and expected increase in unemployment rate is likely to play spoil sport. However, the company seems to have enough liquidity position to weather the current crisis. Also, GIL stated that it has ample inventory to support its customers. Though the stock looks attractive on the valuation front, thanks to the recent correction in price, we prefer to remain on sidelines given the lack of visibility and near-term challenges. Hence, we recommend a ‘Watch’ on GIL stock at the closing price of CAD 22.28 on April 29, 2020.

GIL One-Year Daily Price Chart (Source: Thomson Reuters)

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